Archive for January, 2012

European Union (minus 2) signs unattainable fiscal compact

January 31, 2012

The United Kingdom and the Czech Republic rationally refused to sign off an a cynical and unattainable EU fiscal compact that supposedly tightens fiscal union.  The remaining 25 EU members – including all members of the Euro-zone – agreed to sign the compact. The British Prime Minister, David Cameron, backed away from a threat to veto the use of EU institutions to enforce the new fiscal compact.

Financial markets passed their own judgment on the charade, with the euro losing ground, European stocks declining in value.  Portugal’s borrowing costs surged, with the 10-year bond yield peaking at 21 percent. As always, financial markets trump politics as the relevant measuring rod of confidence concerning  political deals.

The fiscal pact is a German-sponsored treaty among the 17 euro-zone nations and eight other EU countries. It will require governments to keep their budgets to an average of 0.5 percent of GDP over the economic cycle and to reduce their total government debt to 60 percent of GDP ‘over time’. The EU has long-standing rules that are supposed to limit budget deficits to 3 percent of GDP and government debt to 60 percent of GDP.  These rules have never been enforced.

The pact supposedly will empower the European Court of Justice to impose fines on euro countries running excessive deficits. Fines will be capped at 0.1 percent of GDP.  Such a fine would fall within the error term of any national budget.

The pact limits are currently honored largely in the breach. For example, within the euro-zone, only Estonia and Luxembourg ran a budget surplus in 2011.  Only Finland, of  the remaining 15 members, ran a budget deficit within the new pact limits.  In 2011, the average euro-zone deficit amounted to 3.8 percent of GDP.

Again, within the euro-zone, only five  countries – Estonia, Luxembourg, Slovakia, Slovenia, and Finland, complied with the 60 percent of GDP debt limit in 2011.  The average euro-zone debt to GDP ratio ran out at 88 percent.

Note that Germany, the architect of the fiscal pact, failed to comply with either limit in 2011. What are the chances of the European Court of Justice ever fining Germany and France in the order of tens of billions of dollars per annum  for budgetary indiscretion?  And where would the money be channeled, should such an extraction occur?

The EU (minus 2) pact reminds one of a not untypical situation that arises in any major tourist city where ordinances against prostitution are enacted. A city police car drives up to a hooker soliciting business by the kerbside.  ‘Out of business immediately; or we’ll throw you into the slammer,’ shouts the ‘bad’ cop from the nearside window. ‘Meet you round the block, honey; don’t keep us waiting,’  whispers the’ good’ cop on his cell phone, from the passenger seat of the car.

All the parties involved completely understand the nature and intent of the new ordinance.

The declining extent of poverty in the United States

January 30, 2012

Income inequality, as measured by the Gini index,  has increased in the United States – and indeed across  Europe – over the past thirty-five years.  The Gini index is named for the Italian statistician, Corrado Gini, who designed it in 1912.  The value of the index varies between zero, when each person has exactly the same income, and 1, when one person has all of the income, and everyone else has none.

In mid-1970s, America, the index was 0.316.  It rose to 0.378 by the late 2000s.  This by no means is a dramatic increase, but it has become a magnet for progressive activists. No one denies that poverty is a problem. However, the Gini index not- withstanding, the plight of the poor has been moderated by increasing prosperity across the American economy.

“Between 1970 and 2010, the net worth of American households more than doubled, as did the number of television sets and air-conditioning units per home.  In his book The Poverty of the Poverty Rate, Nicholas Eberstadt shows that over the past 30 or so years, the percentage of low-income children in the United States who are underweight has gone down, the share of low-income households lacking complete plumbing facilities has declined, and the area of their homes adequately heated has gone up.  The fraction of poor households with a telephone, a television set and a clothes dryer has risen sharply.” James Q. Wilson, ‘Don’t Blame The Rich’, The Washington Post, January 29, 2012

Essentially, the country has become more prosperous, as measured not by income but by consumption. In constant dollars, consumption by people in the lowest quintile rose by more than 40 percent over the past four decades. From this perspective, income, as measured by the federal government, is an unreliable indicator of economic well-being. Consumption is the more appropriate measure and consumption statistics tell us that poverty has become less of a problem.

Rather than raising marginal tax rates, at an extremely high excess burden, on the top 1 percent of incomes, and then wasting that revenue on political maneuvers designed to maintain the gravy-train by ensuring that poverty never goes away, I endorse the support provided by James Q. Wilson for an experiment that is currently under way in the United Kingdom:

One new strategy for helping the poor improve their condition is known as the ‘social impact bond,’ which is being tested in Britain and has been endorsed by the Obama administration.  Under this approach, private investors, including foundations, put up money to pay for a program initiative to help low-income people get jobs, stay out of prison or remain in school, for example.  A government agency evaluates the results.  If the program is succeeding, the agency reimburses the investors; if not, they get no government money…It may not be easy for the social impact bond market to work consistently; but it offers one big benefit: Instead of carping about who is rich, we would be trying to help people who are poor.” James Q. Wilson, ‘Don’t Blame The Rich’, ibid.

Amen to that!


The top 1 percent is a moving target and not the problem

January 29, 2012

President Obama’s fragile understanding of economics came to the fore once again in his latest State of the Union political campaign speech. Like many intellectually-challenged thinkers, the President operates from a frozen landscape of income distribution across America. The top 1 percent is the target of his political venom; and the unchanging 99 percent is the beneficiary of his pursuit of a humungous vote-majority in November 2012.

The income distribution reality differs sharply from that embedded in the President’s brain, as Harvard Professor Emeritus,  James Q. Wilson outlines:

“The ‘rich’ in America are not a monolithic unchanging class. A study by Thomas A. Garrett, economist at the Federal Reserve Bank of St. Louis, found that less than half the people in the top 1 percent in 1996 were still there in 2005…Mobility is not limited to the top-earning households.  A study by the Federal Reserve Bank of  Minneapolis found that nearly half of the families in the lowest fifth of income earners in 2001 had moved up within six years.  Over the same period, more than a third of those in the highest fifth of income-earners had moved down.” James Q. Wilson, ‘Don’t Blame The Rich’, The Washington Post, January 29, 2012

The rich tend to have greater education than the less-well-0ff.  They also tend to have spouses who work full time.  The past three decades have shown significant increases in real earnings for both categories. 

The Bureau of Labor Statistics found that, between 1979 and 2010, hourly wages for men and women with at least a college degree advanced by 33 percent and 20 percent respectively.  During the same time-period, hourly wages for men and women with less than a high school diploma fell by 31 percent and 9 percent respectively.

Households with two earners have also seen their incomes rise, not least because of women’s increased participation in the workforce – which doubled between 1950 and 2005.

So perhaps the President should focus his taxation-venom on men and women who secure college degrees and above and on all households where women work. That, of course, would surely not suit his 2012  campaign objectives.

As Professor Wilson emphasizes, the real income problem in America is not a question of who is rich, but rather of who is poor, and why.  Among the bottom fifth of income earners, many individuals, especially men, stay there their entire lives. Low education, drug addiction, addiction to street crimes, and unwed motherhood systematically exacerbate poverty. 

This is especially a problem among the black population. Brookings Institution economist, Scott Winship has estimated that two-thirds of black children in America experience a level of poverty that only 6 percent of white children will ever see.

Making the poor more economically mobile has nothing whatsoever to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills, and induce them to join the legitimate workforce. The problem facing the poor is that they have too few skills and poor attitudes towards self-advancement.

President Obama is so obsessed with his personal campaign for four more opulent years in the White House that he ignores completely the real economic problem that confronts America. Such is always the way with progressive leaders.

Mao Zedong spent the years 1958 to 1963 in a palace close to the Forbidden City, gorging on the best food and wine, surrounded with limitless female companions, and entertaining Communist Party cronies to limitless banquets, while he created the Great Leap Backward conditions for the Great Famine in which an estimated 48 million urban and rural Chinese were callously starved to death.

Josef Stalin enjoyed a similar lavish lifestyle throughout the years 1930-1932 when some 4 million Ukrainians starved to death in a famine  that he deliberately imposed on them because (like the rich for Obama) they had challenged his drive to collectivization.

President Obama’s ambitions and venom are far less pronounced than their’s. Yet, by his ignorance and personal ambition, he threatens the basic structure of a society which, by world-standards,  provides America’s poor with an enviable standard of living.

State capitalism displaces the market economy

January 28, 2012

The twenty-first century has evidenced a remarkable worldwide  shift away from both the market economy model and the socialist economy model  in favor of  state capitalism. While the shift is undoubtedly beneficial for those who labored under socialism, it is unequivocally disastrous for those who thrived under market economy conditions.

In this column, I shall focus attention primarily on state capitalism in so-called emerging countries. China and Singapore are usually paraded as examples of high-performing state capitalist economies. China, indeed, is now the leading practitioner of this pervasive phenomenon. Its relative success, however, is an unreliable indicator for the rest of the emerging nations.

First, for state capitalism to have any chance of success is must be directed by a competent state.  China  has a strong Mandarin culture which was not entirely destroyed by the evil dictatorship of Mao Zedong.  India, Brazil, South Africa Argentina, Venezuela and many other emulators do not have such a strong administrative culture.

Second, well-directed state capitalism performs best when copying the innovations of others. This is so because governments are prepared to ignore the property rights of others and are eager to steal technology.  They tend, because of lengthy experience, to be efficient thieves. Notably, however, they are not effective innovators. So as soon as they have to produce new ideas of their own, puff there goes the market miracle!  Japan is the outstanding example of this blow-out phenomenon.

Third, state capitalism always favors well-connected insiders over more innovative outsiders. In China, for example,  unproductive princelings have seized almost all the state capitalist spoils. In Russia, a clique of oligarchs dominates both the Kremlin and business, such as that is. Thus, the state capitalist model induces cronyism, inequality and, eventually (one hopes) revolution. 

Fourth, state capitalism always supports its losers through bail-outs and other subsidies. Americans should be fully aware of this given the hand-outs so recently provided to financial institutions, automobile producers, so-called energy-savers,  rapid-transit rail systems and other political boondoggles favored by the President and compliant members of Congress because of campaign donations received from unscrupulous state capitalist beneficiaries such as Warren Buffet and George Soros.


If only pigs could fly

January 27, 2012

Newt Gingrich is surely one of the fattest politicians to run for the White House in recent years. He is truly a short, rotund porker, looking every ounce a man who loves to take home the bacon and wallop it down.  On the BMI scale Newt is well into the obese category. When  76 year-old Ron Paul challenged the decade-younger Newt to a 25 mile one-on-one  bicycle race in Florida earlier this week, the Fat One almost went into cardiac arrest.

Yet Newt, in his latest flight of fantasy, has no hesitation in declaring that the Moon will become America’s 51st state during his second-term presidency. For Newt, of course, the second -term is viewed as automatic, once his magic wand has restored the United States to prosperity.

“I think the number is 13,000 – when we have 13,000 Americans living on the moon, they can petition  to become a state.   By the end of my second term, we will have the first permanent base on the moon, and it will be American.  We will have commercial near-Earth activities that include science, tourism and manufacturing”  Newt Gingrich at Cocoa Beach, Florida.

Presumably, the Moon State will provide Newt with an inexhaustible supply of ever-younger wenches and an inexhaustible supply of pork to satisfy his twin appetites.

Back on Earth, Newt  still struggles to divert attention from the unfortunate consequences of his more youthful appetites.

“Back on the ground in Florida, Newt continues to try to put to bed his reputation with his wives, if not the wives themselves.  Just when he thought he was in a friendly forum in Miami, another pesky television correspondent asked him why he led the Republican campaign to impeach Bill Clinton for zipper disease when he was losing a struggle with his own zipper.” Wesley Pruden, ‘Off  to the moon with randy Newt’, The Washington Times January 27, 2012

Newt Gingrich is most popular among young voters. For they have no personal remembrance of his history as a political loser, as an unethical Speaker and as a serial philanderer. Yesterday, Bob Dole, a former Majority Leader of the Senate,  published a reminder about Newt Gingrich’s unsavory past.  The Republican primary voters would do well to take heed of his words of warning.

Columnist Mark Shields tells of an exchange – perhaps apocryphal, like so much of Newt – between Newt and Bob Dole who had the sharpest tongue in town. ‘Why do people take such an instant dislike to me?’ Newt asked.  The senator replied: ‘It saves them time.’ Wesley Pruden, ibid.

Barack Obama campaigns from the red corner

January 26, 2012

Once one penetrates the false rhetoric of the State of the Union Address, it is clear that Barack Obama is now determined to campaign for the 2012 election under his true color – socialist red. Since a majority of Americans do not share this color, the President is gambling on his ability to fool an electoral majority into voting against their long-term interest. 

Such events do happen. Adolf Hitler was voted into office through the democratic process in Germany.  Hugo Chavez was voted into office,  twice, through the democratic process in Venezuela.  Juan Peron was voted into office through the democratic process in Argentina.

‘Fool me once, shame on you’ might be a justifiable defense for those who put Obama into the White House in 2008. ‘  Fool me twice, shame on me’ will be the only viable response, if the Red Corner succeeds yet again in 2012.

So how does Obama aim to pull off a second electoral fraud?

Through the use of lies, damned lies and statistics! No more and no less. ‘America should not settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by.’ (Obama January 24, 2012)

Between 1980 and 2007, free market policies initiated by President Reagan created an environment in which United States gross domestic product grew by more than 3 per cent pert annum and in which 50 million net new jobs were created.  This expansion massively increased the size of middle-class  and upper-middle class America.  Per capita income increased by 65 per cent over that period and household incomes rose substantially across all income categories.

Let us define the middle class as comprising households with incomes between $35,000 and $105,000 per annum (in inflation-adjusted dollars). Over the period 1980-2007, the middle-class so defined surely declined, from 64 per cent to 51 per cent of the total.

It did not decline, however, because a larger percentage of households fell below that range. The percentage of households making less than $35,000 stayed approximately the same, at approximately 25 per cent, despite a rapidly increasing divorce rate that increased the percentage of single-parent households.

The middle class so defined, declined because many households became richer and moved into the upper-middle-class category.  The percentage of households making more than $105,000 in inflation-adjusted dollars more than doubled over that period ,  from 11 to 24 per cent of the total.

So there is lie number 1 on which the Red Corner hopes to stake its claim.

Lie number 2 is advanced to support the so-called Buffet claim that any one earning more than $1 million per annum should pay at least 30 per cent of that income ($336,000) in federal income taxes. This, claims Obama, is the effective federal income tax rate outlayed by middle-class Americans. Obama claims that wealthy taxpayers pay approximately one-half of that rate, because of limits on dividend and capital gains tax rates.

Obama is falsifying the facts with respect to both assertions. Income earned from capital gains and dividends has already been taxed at the rate of 39 percent through the corporate tax. So such wealthy individuals pay an effective rate a little less than 54 per cent (allowing for personal deductions etc).

Middle class households pay average federal income taxes of less than 12 per cent, once brackets, personal exemptions and other tax avoidance is accounted for.  Warren Buffet’s secretary most probably paid less than 10 per cent of her income in federal income taxes. I exclude payroll taxes from this calculation because they are supposed to be personal investments into the Social Security Trust Fund.

So there we have it readers. Are Americans, in 2012, so poorly educated that they cannot locate truth from fantasy on issues as basic as this?  If so, they they will receive what they deserve, as another four years of  Obamamonics destroys the economic freedoms on which prosperity must be grounded.

The proven recipe for American prosperity is economic freedom

January 25, 2012

More than 50 years of experience clearly demonstrates that America prospers when economic freedom increases and suffers when it contracts. The Founders wisely grounded the Republic in terms of economic freedom. The unfolding years since then have served to prove them correct in this judgment

John B. Taylor succinctly defines the principles of economic freedom in the following terms:

“At their most basic level, these principles are that families, individuals and entrepreneurs must be free to decide what to produce, what to consume, what to buy and sell, and how to help others.  Their decisions are to be made within a predictable government policy framework based on the rule of law, with strong incentives derived from the market system, and with a clearly limited role for government.” John B. Taylor, ‘Economics for the Long Run’, The Wall Street Journal, January 25, 2012

Between 1960 and 2012 American economic policy has displayed major shifts between more and less economic freedom, between more and less emphasis on rules-based fiscal and monetary policy, between more and less expansive roles for government, and more and less reliance on markets and incentives.  Unequivocally, these shifts make the case for more economic freedom as above-defined.

From 1960 to 1980, economic freedom contracted – under the administrations of Kennedy, Johnson, Nixon, Ford, and Carter – as left-leaning Keynesian  economists flooded into Washington, imposing short-term fiscal stimuli, temporary tax rebates or surcharges, stop-go monetary policies and  wage-price controls against a back-cloth of high and rising marginal rates of income tax.

The result was stagflation.

Between 1981 and 2000 – under the administrations of Reagan, Bush Sr., and Clinton – economic freedoms advanced. Long-term tax cuts were implemented, fiscal policy became more predictable and less invasive, monetary policy followed well-articulated rules.

The result was significant economic growth, high rates of employment and price stability.

From 2001 onwards – under the administrations of Bush Jr. and Obama – economic freedoms have contracted, and will continue so to do for certain should Obama gain a second term.

The result is economic stagnation with high unemployment. Inflation lurks in the wings.

The evidence is clear. All rational, thinking individuals must be aware of it by now. The question remains:

Will the electoral majority in November 2012 be rational and thinking, or will it comprise  irrational bundles of emotion driven over the economic abyss  by the false rhetoric of economic fairness?

Obama’s appalling Islamic bequest to Egypt and the Middle East

January 24, 2012

President Obama’s intervention to bring down President Hosni Mubarek in 2011 predictably has resulted in an American nightmare in Egypt.  Islamists, not liberals or secularists, are poised to profit from the political aftermath of that intervention. The Muslim Brotherhood’s Freedom and Justice Party and the yet more fundamentalist Nour Party have won two-thirds of the seats in Egypt’s next parliament.

However much President Obama personally may rejoice in this advance of Islam across the Middle East, American citizens should be gravely concerned by what is happening.  For a  30-year long security relationship between Washington and Cairo is now in serious jeopardy.

First, Muslim Brotherhood leaders have promised to put Egypt’s 1979 peace treaty with Israel to a popular referendum.  Almost certainly, the referendum will reject that treaty.  Second, a Muslim Brotherhood-governed Egypt is clearly inclined to fueling rather than to countering violent extremism.  From this perspective, the Brotherhood’s invitation for al Gama’a al-Islamiya to join its coalition is a source of grave concern.  For al Gama is a U.S designated terrorist organization.

Third, an Islamist-led Egypt will be inhospitable to religious minorities and to Egyptian secularists. The newly-elected Islamists are committed to making Shariah the exclusive source for all Egyptian legislation and to prosecute any individual who criticizes Islamic law.

The only powerful agent that now stands between the parliamentary majority and Islamic fundamentalism is the Egyptian military.  The US –  as paymaster for that military in the order of $1.2 billion per annum – presumably can impress its will upon that agency. It may already be none too soon for the Egyptian military to intervene to insist on secular rule across Egypt, under a direct threat to suppress parliament and impose military rule, if the Muslim majority does not accede to its demands.

American policy should always be governed by political realism and not by bv bleeding-heart liberalism.

“Merely protecting Egypt-Israel security and defending pluralism and minority rights would be a far cry from the robust partnership of years past.  But given the hand the U.S. has been dealt, this approach stands the best chance of preserving what matters most to long-term American interests.” Robert Satloff and Eric Trager, ‘How the U.S. Should handle the Islamist Rise in Egypt’, The Wall Street Journal, January 23, 2012

Satloff and Trager are far too kind to the United States. The bad hand was dealt to them by its own President. This is just one more example why the U.S. electorate, in its majority,  should refrain from electing political incompetents into the White House.

Implications of America’s cultural and geographical divide

January 23, 2012

Yesterday, I drew attention to Charles Murray’s statistics on the cultural and geographic  divide between upper-middle class  and working class white Americans aged between 30 and 49 years of age. Today, I shall focus attention on some implications of this division.

Over the past 50 years America’s largely common civil culture among these two white subgroups has unraveled.  The  white upper-middle class group (WUC) is now fairly comprehensively endowed with advanced education, often obtained at elite, non-state universities and colleges, with shared tastes and preferences that set them apart from mainstream America. Simultaneously, a new white working class (WWC) has emerged, characterized not by poverty, but by a withdrawal from America’s core cultural institutions.

Charles Murray characterizes the divide in terms of  two fictional neighborhoods: Belmont (located near Boston) representative of the WUC and Fishtown (located in Philadelphia) representative of the WWC.  These two neighborhoods are characterized by the statistics that I identified yesterday.

He identifies a number of worrying implications as arising from this division:

1.  single parenthood: In terms of just about any measure of development one can identify, children  born to unmarried women fare worse than children of divorce, and far worse than children raised in intact families.  This reality holds even after controlling for the income and education levels of the parents. Fishtown stands at an enormous disadvantage against Belmont in terms of this metric.

2.  industriousness: In terms of availability for work and willingness to work 40 hours per week, the level of industriousness in Fishtown stands far below that in Belmont. Remember that Murray chose 2008 and not 2010 to measure this difference specifically in order to avoid any uneven impact of the financial crisis.

3.  crime: The surge in crime that began in the mid 1960s, and continued through the 1980s,  left Belmont almost untouched. It ravaged Fishtown.  Between 1960 and 1995, the rate of violent crime in Fishtown more than sextupled, while remaining flat in Belmont. The reduction in crime since the mid-1990s, affecting the nation as a whole, has been much smaller in Fishtown,  than in Belmont, leaving  Fishtown today with a violent crime rate that is still 4.7 times the 1960 rate.

4. religiosity: Approximately 50 per cent of American philanthropy, volunteering, and associational memberships is directly church-related.  Religious Americans account for much more non-religious social capital than their secular neighbors. Although America as a nation has become markedly more secular since 1960, Fishtown has become much more secular than Belmont.  This implies that many more children in Belmont than in Fishtown benefit from Sunday School educational and cultural discipline in an out-of-school environment.  Many more such children obtain an understanding of a well-established and well-tested  moral code that encourages mutually beneficial  social interaction.

5.  other implications: Because of the growing  geographical separation between Belmont and Fishtown significant lifestyle differences exist.  These have to do with the kinds of  food that Belmonters eat, the ages at which they marry (or do not), the ages at which they have children, the books that they read, and their number, the television shows that they watch, and for how long, the way in which they take care of their bodies, the conversations that they have or do not have,  their leisure activities,  their work environments, and their child-raising practices. 

 Taken together, these differences exaggerate initial cultural differences between residents of Belmont and residents of Fishtown. Note that Murray is not focusing here on differences primarily driven by income differentials – although these differences cannot be ignored –  but rather on differences driven by cultural choices.

Murray suggests in his book that these differences are not significantly amenable to government policy-intervention – whether from the Left or from the Right.  He discusses a range of voluntary measures, largely involving the residents of the SUPER ZIP codes diversifying their residencies into other neighborhoods. Quite frankly, that is not going to happen, for reasons that Murray has already identified.

Nevertheless, if Charles Murray is correct in his diagnosis, then he has performed a great service to his country. For, without the diagnosis of a problem, solutions will not be explored at all. And that implies a long-term ossification in the cultural and geographic divide between white upper-middle class and white working class families across this nation. And down the road, that implies serious problems that surely will require government intervention.


Obituary for William A. Niskanen Jr by Steve Hanke

January 23, 2012

In late October 2011, Bill Niskanen died. Many of you will know him as a great classical liberal political economist.  Many others will know about him as a Founding Father of Public Choice. Those of you who are not acquainted with him surely will benefit from learning about his important contributions to knowledge.

On January 4, 2012, Professor Steve H. Hanke (Johns Hopkins University)  posted a superb Remembrance of Bill Niskanen at the Cato Institute website. This Remembrance can be accessed at the following address:

Bill Niskanen was one of my very best and most highly-esteemed colleagues. I miss him greatly.

Charles K. Rowley